Investment irreversibility, policy uncertainty and hedging strategies

Li Yang; Frederick Foster

Finance

Project Summary

Investment irreversibility, policy uncertainty and hedging strategies. This project aims to investigate how firms’ financial hedging and production decisions reduce shocks caused by potentially unstable regulatory policies, particularly when the investments are largely irreversible. Unstable regulatory policies induce shocks to the economy, but a joint hedging and production decision is more effective than using financial hedging alone to smooth shocks. Firms that anticipate regulatory change alter their responses to policies, potentially rendering those policies less effective. This project’s investigation of Australian mining and energy industries should provide understanding of firms’ hedging behaviour and could have implications for the design of policy.